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The Resilience of High-End Retail Properties Amid Rising Interest Rates




Despite modest rent growth, the competition to acquire the world’s most exclusive retail properties remains fierce, attracting attention from major players like Blackstone.


The Appeal of Luxury Retail Real Estate

High interest rates have done little to dampen the demand for elite retail spaces in Europe and the U.S. While the average commercial property has seen a 20% drop in value since 2022, top-tier luxury stores remain largely unaffected. These prestigious shopping locations, including Rodeo Drive in Beverly Hills and Fifth Avenue in New York, continue to command exorbitant prices.


Noteworthy Transactions in the Luxury Sector

Recently, Cartier’s parent company, Compagnie Financière Richemont, acquired a property on London’s Bond Street with a notably low rent yield of 2.2%. This rate is striking given that the Bank of England’s base rate is nearly twice this figure. Such yields are typically unattractive to most investors, as they do not cover the cost of borrowing.


In another significant deal, Blackstone sold a luxury store on Milan’s Via Montenapoleone to Gucci owner Kering for a substantial price. The building, part of a larger portfolio bought in 2021 for €1.1 billion, fetched €1.3 billion alone, reflecting a 2.5% rent yield.


Limited Supply Fuels Intense Competition

Luxury retail spaces offer something rare: scarcity. For instance, London’s Bond Street has only 150 buildings, with about two-thirds deemed suitable for flagship stores. New York’s Fifth Avenue has an even tighter supply, with only four or five blocks considered prime locations. Rodeo Drive in Los Angeles has fewer than 50 individual buildings.


This limited availability drives fierce competition for ownership. LVMH, the world’s largest luxury company, owns multiple properties on both Rodeo Drive and Bond Street, ensuring prime locations for its 70+ brands.


The Strategic Value of Flagship Stores

For luxury brands, flagship stores serve as crucial marketing tools, enhancing their physical presence even in the digital age. Many brands, including Christian Dior, have transformed their boutiques into experiential spaces featuring restaurants and mini-museums to attract shoppers.


With significant investments in store refurbishments, owning these properties becomes more advantageous than renting. Since the start of 2023, luxury brands have spent over $9 billion on real estate, doubling their control over key shopping districts.


Shifts in Ownership Dynamics

Luxury brands are increasingly buying properties to avoid being displaced by competitors. For example, Hermès recently purchased a building on Bond Street, prompting long-term tenant Asprey to vacate. Similarly, Rolex acquired a store currently leased to Patek Philippe, securing its future presence.


Market Trends and Future Outlook

Traditionally, sovereign-wealth funds and wealthy families have dominated ownership of luxury retail properties. However, the high prices brands are willing to pay, even in a high-interest-rate environment, are enticing some of these long-term owners to sell.


Hong Kong investors, who began investing in luxury stores around 2010, are among those cashing out. Real estate investor Jeff Sutton’s Wharton Properties also sold two buildings on Fifth Avenue to Kering and Prada at high prices.


Conclusion

Luxury brands accumulated substantial wealth during the pandemic, and with limited merger and acquisition activity, real estate investments offer an attractive alternative. Consequently, property deals on the world’s most prestigious shopping streets are expected to thrive, irrespective of central bank policies.

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